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Bank 
Acceptances 


Guaranty  Trust  Company 
of  New  York 

140  Broadway 

Fifth  Avenue  Branch  London  Office 

5th  Ave.  and  43d  St.  33  Lombard  St.,  E.  C. 


Copyright,   1915 

by 

Guaranty  Trust   Company 

of  Npw  York 


ACCEPTANCES 

Definition 

In  order  to  thoroughly  understand  the 
meaning  of  an  acceptance  it  is  first  necessary 
to  consider  the  definition  of  a  hill  of  ex- 
cliange,  because  an  acceptance  is  first  a  bill 
of  exchange  before  it  becomes  an  acceptance. 

A  bill  of  exchange,  therefore,  is  an  un- 
conditional order,  in  writing,  addressed  by 
one  person  to  another,  signed  by  the  per- 
son giving  it,  requiring  the  person  to  whom 
it  is  addressed  to  pay  on  demand,  or  at  a 
fixed  future  time,  to  order  or  to  bearer,  a 
sum  certain  in  money. 

A  bill  of  exchange  becomes  an  acceptance 
when  the  drawee  writes  across  the  face  of 
it  for  example:  Accepted,  February  15, 
1915,  payable  May  15,  1915,  John  Doe." 

332196 


Two  Kinds  of  Acceptances 

There  are  two  kinds  of  acceptances : 

(1)  Those  made  by  private  parties,  such 
as  individuals,  firms  or  corporations; 
(See  page  2.) 

(2)  Those  made  by  banks  for  their  cus- 
tomers by  means  of  which  the  credit  of 
the  bank  is  extended  to  the  customer. 
(See  page  4.) 

Acceptances  made  by  private  parties  are 
usually  in  connection  with  transactions  for 
the  purchase  of  merchandise  or  for  the 
financing  thereof. 


Bank   Acceptances 

A  bank  acceptance  consists  of  the 
extensionof  the  bank's  credit  to  a  customer 
by  which  the  bank  permits  the  use  of  its 
own  credit  by  its  client  for  a  consideration, 
such  credit  being  either  secured  or  un- 
secured, depending  entirely  upon  the  busi- 
ness character  and  financial  responsibility 


of  the  applicant.    A  hank  aceeptaiicemaiy 

be  created  as  follows : 

A  B  &  Co.  in  New  York  buy  of 
C  D  &  Co.  in  Galveston  a  quantity  of 
merchandise.  In  order  to  reimburse 
C  D  &  Co.  in  a  convenient  manner, 
A  B  &  Co.  arrange  with  their  bank  to 
accept  on  presentation  the  drafts  of  C  D 
&  Co.,  with  documents  for  the  mer- 
chandise attached.  C  D  &  Co.  there- 
upon, under  the  terms  of  the  sale,  draw 
on  the  bank,  which  accepts  the  drafts, 
taking  the  documents.  The  draft  thus 
becomes  a  bank  acceptance.  Then  en- 
sues a  credit  operation  between  the  bank 
and  A  B  &  Co.  as  to  what  disposition  is 
to  be  made  of  the  documents  and  under 
what  terms  A  B  &  Co.  shall  receive  the 
documents  from  the  bank,  (it  must  be 
borne  in  mind  that  the  bank  is  primarily 
liable  upon  its  acceptance  and  the 
security  for  its  acceptance  is  the  mer- 
chandise for  which  it  so  acted.)  This 
is  usually  easily  adjusted.  A  B  &  Co. 
undertake  by  some  means  or  other,  to 
provide    the  bank   with    funds    prior   to 


maturity  of  the  draft  in  order  that  the 

acceptance  for    which    the  bank   stands 

responsible,  at  the  request  of  A  B  &  Co., 

may  be  met. 
New  York   State    Banking  Law 

Under  the  new  Banking  Law  of  the 
State  of  New  York,  passed  in  1914,  banks 
and  trust  companies  that  are  under  the 
supervision  of  the  State  Banking  Depart- 
ment are  permitted  to  accept  for  payment 
at  a  future  date  drafts  drawn  upon  (them) 
by  (their)  customers  and  issue  letters  of 
credit  authorizing  the  holders  thereof  to 
draw  drafts  upon  (them)  or  (their)  corre- 
spondents at  sight  or  on  time,  not  exceeding 
one  year.'* 

By  this  provision  all  state  banks  and 
trust  companies  in  New  York  State  are 
given  the  power  to  make  both  foreign  and 
domestic  acceptances. 

Federal  Reserve  Act 

The  Federal  Reserve  Act  permits  mem- 
ber banks  to  accept  bills  involving  the  ex- 
portation or  importation  of  goods,  but  does 
not  permit  the  acceptance  of  bills  covering 
domestic  transactions 

6 


Market  for  Acceptances 

It  is  obvious  that  prime  bank  acceptances, 
backed  as  they  are  by  well-known  banks  or 
trust  companies,  and  readily  rediscountable, 
can  find  eager  purchasers  by  virtue  of  their 
high  intrinsic  security  as  the  most  liquid 
form  of  investment  for  banking  institutions. 
Aside  from  cash  in  the  vault  nothing  is  so 
rapidly  liquidated,  especially  in  view  of  the 
existing  Federal  Reserve  system. 

Acceptances  are  an  important  factor  in 
Europe  in  the  open  discount  market,  and 
as  soon  as  a  market  is  provided  in  this 
country  they  no  doubt  will  become  a  most 
popular  form  of  investment. 

With  the  object  of  assisting  in  the  estab- 
lishment of  such  a  market,  which  as  yet  is 
only  slightly  developed,  the  Guaranty 
Tiiist  Company  of  New  York  has  been  deal- 
ing in  first-class  paper  of  this  character 
since  the  present  New  York  State  Banking 
Law  was  passed. 

7 


Advantages 

There  are  certain  distinct  advantages 
both  to  banks  and  their  customers  to  be 
derived  from  the  creation  of  acceptances. 
These  may  be  summarized  as  follows : 

(1)  Bank  customers  can  ordinarily  borrow 
by  this  means  more  cheaply  than  by 
their  straight  note. 

(2)  The  use  of  acceptances  makes  it  pos- 
sible for  bank^  and  trust  companies  to 
properly  and  conveniently  finance 
legitimate  business  transactions  of 
their  customers  without  using  any  of 
the  bank's  funds  or  the  use  of  any 
additional  funds. 

(3)  Banks  having  surplus  money  which 
cannot  be  readily  employed  at  the 
time  can  invest  it  in  prime  acceptances, 
which  can  either  be  held  until  matu- 
rity or  sold  in  the  open  market,  should 
such  action  be  found  necessary. 

(4)  Acceptances  of  well-known  institutions 
will  more  and  more  be  sought  as 
short-term  investments  and  will  be 
especially  valuable  for  such  a  purpose, 
principally  on  account  of  their  ready 
marketability. 


(5)  Banks  and  trust  companies  can  accept 
for  a  commission  the  paper  issued  by 
their  best  customers  and  sell  it  in  the 
open  market,  thus  adding  to  their 
business  another  feature  which  can  be 
a  source  of  definite  profit. 

(d)  The  presence  of  the  name  of  the 
accepting  bank  makes  prime  to  the 
extent  of  the  credit  of  the  accepting 
bank  the  paper  on  which  it  appears. 
This  at  once  eliminates  the  necessity 
and  bother  of  checking  the  drawer  or 
several  endorsers  upon  paper,  as  the 
primary  responsibility  rests  with  the 
accepting  bank.  If  this  is  in  good 
credit  all  other  names  on  the  paper  be- 
come proportionately  of  less  interest. 

(7)  With  the  development  of  the  use  of 
bank  acceptances,  the  knowledge  of 
the  relations  that  the  borrower  has 
with  other  institutions,  which  the 
credit-extending  banks  will  thus  have, 
will  create  a  condition  of  almost 
automatic  registration  of  paper  ;  thus 
more  than  ever  protecting  the  banks 
as  well  as  the  borrowers  from  the  evil 
results  of  the  over-extension  of  credit. 
9 


Table  showing  Attitude  of  the  Banking 

Laws  of  the  Various   States   in 

Relation  to  Acceptances 

No  Partial 

Specific  Power      Power  Power 

State  to  Accept        to  Accept        to  Accept 

Alabama * 

Arizona! 

Arkansas.  ......  * 

California '^ 

Colorado "^ 

Connecticut .  .  .  .  '^ 

Delaware  ......  ^ 

Florida '^ 

Georgia * 

Idaho ^^ 

Illinois,  t     

Indiana '^ 

Iowa. * 

Kansas * 

Kentucky '"^ 

Louisianaf .....  T^ 

Maine "^  ,  ^^  , 

State 

Maryland |  On?^^ 

Massachusetts  .  •        ^ 

Michigan '"^ 

Minnesota..    -  •  •        ^ 
Mississippi! .  ... 

Missouri    * 

Montana ^^ 

Nebraska ''^ 

tNo  information  received. 

tNo  provision  to  accept  mentioned  In  the  law; 
considered  to  have  this  power  under  broad  provision 
to  do  general  banking  business. 

10 


Table  showing  Attitude  of  the  Banking 

Laws   of  the   Various  States  in 

Relation  to  Acceptances 

No  Partial 

Specific  Power       Power  Power 

State  to  Accept        to  Accept        to  Accept 

Nevadaf 

New  Hampshire 
New  Jersey. .  • . 
New  Mexico. .  •  . 

New  York 

North  Carolina.. 
North  Dakota.  . 

Ohio e 

Oklahoma 

Oregon * 


5{c 


Pennsylvania .  .  - 
Rhode  Island. .  . 
South  Carolina. 
South  Dakota.  •  . 

Tennessee 

Texas 

Utah 

Vermont 

Virginia ^ 

Washington .... 
West  Virginia.  .        * 

Wisconsin * 

Wyoming * 

tNo  information  received. 
11 


Forelg-n 
■<  .  Accept- 
( ances  Only 


f  Common 
I     Law 


1 

UNIVERSITY  OF   CALIFORNIA  LIBRARY 

THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 

STAMPED  BELOW 

m--    -  -•■' 

t   Q.I916 

ty  Lz 

APR    8    1921 

m^i  ^  m\ 

» 1 1  nn 

OCT  14  ,930 

/ 

/ 

/ 
/ 

Gaylord  Bros. 

Makers 

Syracuse,  N.  Y. 

PAT.  JAN.  21, 1908 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


